[Senate Hearing 111-26]
[From the U.S. Government Publishing Office]





                                                         S. Hrg. 111-26

              THE CREDIT CRISIS AND SMALL BUSINESS LENDING

=======================================================================

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 29, 2009

                               __________

        Printed for the use of the Congressional Oversight Panel



























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                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                            Sen. John Sununu
                          Rep. Jeb Hensarling
                           Richard H. Neiman
                             Damon Silvers





















                            C O N T E N T S

                              ----------                              
                                                                   Page
OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
  OVERSIGHT PANEL................................................     1
STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL OVERSIGHT 
  PANEL..........................................................    10
STATEMENT OF WILLIE HINES, JR., PRESIDENT, MILWAUKEE COMMON 
  COUNCIL........................................................    15
STATEMENT OF THOMAS KLINK, PRESIDENT, JEFFERSON ELECTRIC, INC....    16
STATEMENT OF ROBERT ATWELL, CHAIRMAN AND CEO, NICOLET NATIONAL 
  BANK...........................................................    25
STATEMENT OF WAYNE PERRINS, GENERAL MANAGER, BADGER TRAILER AND 
  EQUIPMENT CORPORATION..........................................    30
STATEMENT OF PETER PRICKETT, PRESIDENT AND CEO, FIRST NATIONAL 
  BANK--FOX VALLEY...............................................    35
STATEMENT OF DAVID GRIFFITH, OWNER AND CEO, CROSS TOWNE MACHINING    39
STATEMENT OF PAUL S. BEIDEMAN, CHAIRMAN AND CEO, ASSOCIATED BANC-
  CORP...........................................................    68

 
                  SMALL BUSINESS LENDING IN WISCONSIN

                       WEDNESDAY, APRIL 29, 2009

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                              Milwaukee, Wisconsin.
    The Panel met, pursuant to notice, at 10:05 a.m. in the 
Wisconsin Room, University of Wisconsin Student Union, 2200 
East Kenwood Boulevard, Elizabeth Warren, Chairman of the 
Panel, presiding.
    Attendance: Elizabeth Warren [presiding], Damon Silvers, 
Willie Hines, Jr., Thomas Klink, Robert Atwell, Wayne Perrins, 
Peter Prickett, and David Griffith.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    The Chair. This hearing is called to order.
    Good morning. Welcome to today's hearing of the 
Congressional Oversight Panel, ``The Credit Crisis and Small 
Business Lending.''
    I want to thank Common Council President Willie Hines for 
joining us today. He will give remarks before we hear from our 
witnesses.
    I also want to thank JoAnne Anton with Senator Kohl's 
office. Is JoAnne here? I want to thank JoAnne in person, if we 
can, from Senator Kohl's office, for her assistance to the 
panel in putting together this hearing.
    In addition, I also want to acknowledge the help of Brady 
Williamson, a senior partner in Godfrey & Kahn law firm, both 
for his help in setting up the hearing and for his good counsel 
here.
    My name is Elizabeth Warren. I am the chair of the 
Congressional Oversight Panel.
    This is Damon Silvers. He is the deputy chair of the 
oversight panel.
    Last fall, Congress established this panel to oversee the 
expenditure of funds from the so-called Troubled Asset Relief 
Fund--or Program, known as TARP. I have some trouble with these 
acronyms. I think that is how you can tell I am a true 
Washington outsider. I am having trouble acclimating to that.
    We are here this morning in the spirit of one of the most 
famous native sons of Wisconsin, ``Fighting Bob'' LaFollette, 
who expressed the idea that the panel tries to live by. 
Government must be made more responsible to the people.
    So we are here today to try to bring at least this little 
piece of Government to the people and to the people of 
Wisconsin and to learn something that we can take back to 
Washington and to help us in our oversight of this program.
    Since our first report last December, we have asked 
Treasury a number of tough questions on behalf of taxpayers. 
When we have been unsatisfied with Treasury's answers, we have 
pressed them for more and for better ones. The panel's 
questions have covered a lot of ground, but we have 
consistently pushed for three things--greater transparency, 
more accountability, and greater clarity in Treasury's 
programs.
    Treasury has announced multiple programs intended to 
restart consumer and small business lending, but are those 
programs working? For all the billions and billions of taxpayer 
dollars spent on various programs, is the average family or 
small business in Milwaukee feeling the effects?
    These questions are important not only because of the scale 
of the taxpayers' investment, but also because of the scale of 
economic slowdown and uncertainty all across this country. 
Families from coast to coast are feeling the impact of the 
economic crisis, but it is important to study Milwaukee, in 
part, because it has not been swept into the boom-and-bust 
cycle that has hit some areas.
    Instead, it has felt the impact of the slowdown as part of 
its steady state. Last month, unemployment here surpassed 11 
percent, almost twice the unemployment rate of a year ago. At 
the same time, the Journal Sentinel recently reported that 
mortgage delinquency rates have continued to rise across the 
State, and home values here in Milwaukee have fallen 7.2 
percent in just over the past year.
    The convergence of unemployment, foreclosures, falling home 
values has reduced the confidence of American families and led 
to a vicious economic cycle, one that is understood here as 
well as it is anywhere. While Milwaukee has important 
perspectives on a wide range of economic issues, we have come 
here today for a specific purpose--to learn more about the 
impact of the credit crisis on small business lending here and 
across the State of Wisconsin.
    As everyone in this room knows, small businesses are vital 
to our economy and will be a vital precondition of economic 
recovery. They are not only the engine of innovation in this 
country, they also produce more than half of the nonfarm jobs 
in our economy.
    The challenges of small businesses are many, but the 
acquisition of credit is a vitally important one, especially in 
times of economic slowdown. Today, we have invited small 
business owners and bank officers to testify about the impact 
of the credit crisis on small business lending in Milwaukee. 
Their take on the local economy offers an important context for 
policymaking in Washington.
    Our witnesses today include Tom Klink, president of 
Jefferson Electric, Inc. Jefferson Electric has been designing 
and manufacturing transformers in the Milwaukee area since 1915 
and has grown from $9 million to $27 million in value just over 
the past 5 years.
    Our second witness will be Robert Atwell, chairman and CEO 
of Nicolet National Bank. Nicolet National operates six 
branches in northeast Wisconsin, holds approximately $700 
million in assets, has been a recipient of TARP funds, and has 
reported lending $54 million in new loans since the time of its 
acquisition of TARP money.
    Wayne Perrins, general manager of Badger Trailer and 
Equipment Corporation, will be our third witness. Badger 
Trailer and Equipment makes refrigeration systems for trucks 
and other vehicles and has been family owned and operated in 
Milwaukee since 1916.
    Peter Prickett, our fourth witness, is president and CEO of 
the First National Bank-Fox Valley. First National Bank-Fox 
Valley is based about 100 miles north of Milwaukee. It operates 
four branches in the region. The bank's assets total more than 
$200 million, and it is also a recipient of TARP funds.
    And our fifth witness will be David Griffith, the owner and 
CEO of Cross Towne Machining. Cross Towne Machining 
manufactures precision machinery for clients in the Milwaukee 
area. Although the company has qualified for a 7(a) SBA loan, 
it has been unable to find a bank willing to lend.
    I want to thank each of you for being here, and I look 
forward to hearing more about your business and your 
perspective on the economic challenges in Wisconsin and in the 
Nation.
    I also want to note that Richard Neiman, one of our panel 
members who is also the New York superintendent of banks, 
wanted to express his deep regret that he could not attend this 
morning. Consumer and small business lending is a topic that is 
of great importance to Mr. Neiman, and ensuring access to safe 
and affordable credit is a top priority for him.
    He asked that I convey his gratitude to the witnesses for 
their testimony today, and he is looking forward to reviewing 
our discussion and the question-and-answer afterwards.
    [The prepared statement of Mr. Neiman follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    I now want to recognize my colleague and the deputy chair 
of the Congressional Oversight Panel, Damon Silvers, for any 
remarks that he would like to make.
    [The prepared statement of Ms. Warren follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Mr. Silvers. Good morning, and thank you, Madam Chair.
    I am likewise very pleased to be here in Milwaukee to learn 
about the impact of the Emergency Economic Stabilization Act, I 
think known to most of you as the financial bailout on the real 
economy.
    I would like to express my gratitude to the University of 
Wisconsin-Milwaukee for hosting us here today, to the 
congressional delegation of Wisconsin and their staff for their 
assistance, and to the Small Business Administration's 
Wisconsin offices for their help.
    I would also like to thank our staff for excellent work in 
putting this hearing together and in putting together this 
impressive list of witnesses.
    I am particularly pleased that we have with us today two 
bankers from northern Wisconsin whose written testimony I found 
to be extremely insightful, and I am looking forward to their 
oral testimony. I have family roots in northern Wisconsin. One 
of the earliest photos we have in my family is of my great-
great-grandfather and his sons working in a small business, a 
lumberyard in Mattoon, Wisconsin.
    My grandfather, the Reverend Charles Floyd Fuller, grew up 
on that smallest of small businesses, a family farm in northern 
Wisconsin. More than any other person, my grandfather taught me 
what it is to be a public citizen in the tradition of 
``Fighting Bob'' LaFollette, and I honor his memory here today.
    Wisconsin is a kind of reality check for Washington. The 
Federal Reserve Board issued a paper last week describing the 
big bank stress tests, and it has been very much in the 
newspapers. The Federal Reserve said they had checked to see 
how the banks would do in what the Fed called ``the adverse 
scenario,'' a scenario they described as the future we wish to 
avoid--a scary, distant possibility where unemployment might 
peak at just over 10 percent next year. Here in the City of 
Milwaukee, that future is now with unemployment at 11 percent.
    When Congress enacted the Emergency Economic Stabilization 
Act with its Troubled Asset Repurchase Program, TARP, Congress 
did so clearly out of the concern that the panic in the 
financial markets that we saw last fall threatened the flow of 
credit to the real economy--to America's families and to 
America's employers, to employers like our witnesses today.
    The purpose of TARP was not to rescue Wall Street or to 
make the world safe for derivatives traders. It was to 
stabilize the system that Main Street depended on to allocate 
savings, the savings of families here and around the world, so 
that other families could finance purchases. And so, employers 
could finance their operations on terms that were affordable 
and fair to both the lender and the borrower.
    We are here today to ask are those purposes of TARP being 
fulfilled? Is the credit system working? In particular, is it 
working for small business? What impact has the over $500 
billion of public funds allocated under TARP had on the real 
economy and, again, in particular, on small business finance?
    How are national financial institutions behaving here in 
Wisconsin? What has happened to the smaller banks that are the 
backbone of local credit and, in particular, the backbone of 
small business lending? Can small business access credit on 
terms that are sensible from banks? Can they access credit 
through SBA guarantees? Using personal credit cards?
    In asking these questions, we are not seeking to return to 
the bubble years of 2006. Banks and credit markets cannot 
create viable businesses out of thin air. Excessive 
unsustainable leverage was present throughout our society in 
the bubble not just in home mortgages or credit cards, but in 
leveraged buyouts of companies large and small and hidden in 
complex capital structures and in hedge funds.
    We also cannot ask our credit system to substitute for a 
successful national economic strategy or to make up for 
stagnating real wages. If we dismantle and outsource our real 
economy, cheap credit from our foreign trading partners will 
not substitute for what we have lost, at least not for long. We 
just tried that, and we ended up with the worst economic 
situation since the 1930s.
    But the public and Congress rightfully need to know whether 
the bailout is working to ensure that viable businesses have 
access to credit. Some say it is not a matter of public concern 
what the terms of credit are as long as there is credit. That 
just seems silly to me.
    If we are concerned about credit availability, if Treasury 
tells us they are measuring the success of TARP based, in part, 
on the London interbank lending rates--and they do, indeed, 
tell us that--we should also be looking in terms of our 
evaluation of TARP, on behalf of Congress and the American 
people, at least to some degree at the rates and time horizons 
of credit available here in Wisconsin and in communities like 
yours all across the country.
    This brings me to the fate of our Nation's major financial 
institutions. More than half of all bank assets are now held by 
just four bank holding companies. The 19 banks subject to the 
stress tests account for a substantial majority of all bank 
assets. Business lending by those banks dwarf the SBA program.
    Today, on my way here, I read that the major banks, who now 
hold hundreds of billions of dollars of public money in 
taxpayer assets and guarantees, would like not to be subject to 
stress tests after all, that they would like Government aid 
without conditions. Now how can we possibly avoid the fate of 
an economy dragged down by zombie banks if we cave into big 
banks' demands for more of the same?
    More pretending that sick banks are healthy, more 
pretending that losses and things like subprime loans don't 
exist. More of the treatment where favored big players get 
infinite Government money while smaller banks must prove that 
they don't need Government money before they can get any.
    Business lending, including small business lending, 
requires healthy banks, and we will never have healthy banks 
until we get clarity as to the real nature of big banks' 
balance sheets and until we get those balance sheets properly 
capitalized in a manner that is fair to the public.
    The Obama administration's stress tests are the key 
initiative that has been taken in this direction. They should 
have been tougher, but they are the right basic idea, and they 
must not be further watered down or the results ignored if we 
want to revive business lending.
    We are very fortunate this morning to have a chance to hear 
about the reality of these issues through the experience of 
Wisconsin's small business people and community bankers. I am 
honored to be with the witnesses today, and I look forward very 
much to their testimony.
    Thank you.
    [The prepared statement of Mr. Silvers follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    The Chair. Good. Thank you, Deputy Chair Silvers.
    I want to say I understand that JoAnne Anton is here now in 
the back. Is that right? JoAnne, there you are. So that I 
thanked you before you arrived, but it is always better to 
thank people in person.
    So thank you again for your help in setting this up. We 
appreciate it, and we appreciate the help that Senator Kohl has 
given us in making sure we could come to Milwaukee and do this 
hearing.
    Thanks very much.
    I would like now to recognize Common Council president 
Willie Hines, Jr., to address us. If you would come forward, 
please? And I think there is a seat right in the middle with 
your nametag on it. That way, you own the whole table.
    Mr. President.

  STATEMENT OF WILLIE HINES, JR., PRESIDENT, MILWAUKEE COMMON 
                            COUNCIL

    Mr. Hines. Yes, first let me start out by thanking you, 
Madam Chairperson and Mr. Silvers, for coming to the City of 
Milwaukee. It is an honor and privilege to welcome you here on 
behalf of the City of Milwaukee Common Council. On behalf of 
the citizens and the mayor of the city, again, thank you for 
being here today.
    I do want to thank Senator Kohl and his staff for making it 
possible as well.
    Madam Chair, Professor Warren, thank you for taking time, 
and Mr. Silvers, to understand Milwaukee's perspective and the 
role in combating the credit crisis, especially in relation to 
the responsible small businesses and the current challenges in 
this economy.
    In August 2001, former President Bush said most of the new 
employment in America comes from small business owners. Small 
business is the backbone of our economic system.
    Last month, President Obama said small businesses are the 
heart of the American economy. He added that these jobs are 
responsible for half of all private sector jobs, and they 
created roughly 70 percent of all new jobs in the past decade. 
It would seem that we can all agree on the paramount place that 
small businesses have in sustaining our American economy.
    I know that the Federal Government is taking great pains to 
infuse viable small businesses with fresh capital investment 
and to ensure that money is spent wisely. Believe me, 
Milwaukee's private sector needs that infusion as badly as 
anywhere else, if not even more.
    We have a rich employment heritage in Milwaukee, to say the 
least. For decades, this was the incubator of industry that 
attracted so many European immigrants and many hard-working 
African-Americans from the South in search of the American 
dream. And it was here in Milwaukee, Wisconsin, that they found 
it.
    Milwaukee is still well known in terms of Boeing, 
manufacturing, and motorcycles. But we have fallen on hard 
times, like so many other Rust Belt communities or, like the 
mayor would say, ``fresh coast'' cities, given the Lake 
Michigan and the fresh coast area that we are in.
    Milwaukee was hit hard by globalization even before the 
economic crisis. Now it seems that forces have converged, and 
we are working tirelessly to better stabilize our economy not 
only in Milwaukee, but throughout the State.
    While the stagnant economy represents many challenges, I 
think you will find Milwaukee also offers something else. The 
people here are hard working and humble. By and large, they 
will make the best of their situations, oftentimes not 
grumbling or complaining.
    The companies that you will hear from today have done their 
best to push through uncharted terrain. But they do need your 
assistance in navigating the right route.
    Again, thank you for taking time to hear their stories. We 
all greatly appreciate you being here this morning.
    Hopefully, the information gathered here today and 
throughout the country will enable you to adequately 
communicate to Congress the challenges that America faces and 
its small businesses are dealing with on a daily basis. And 
hopefully, appropriate policies can be put forth to assist 
them.
    Again, on behalf of the City of Milwaukee, welcome. Thank 
you again for being here.
    The Chair. Thank you, Mr. President. We appreciate your 
remarks.
    So I would like to call our five witnesses forward. We will 
have name cards here in front for everyone. If you all would 
come on up, I would appreciate it--all five of you.
    So I am going to ask you, if you could, to hold your oral 
remarks to 5 minutes. You will see a little timer that will 
turn yellow when you have just 1 minute left. But your entire 
written statement is part of the public record.
    So if there is anything we are not able to cover in the 
oral testimony, you should have confidence it will nonetheless 
be in the record. That will leave us enough time to be able to 
do some questions that I think will be helpful.
    So, Mr. Klink, if I could start with you, please?

 STATEMENT OF THOMAS KLINK, PRESIDENT, JEFFERSON ELECTRIC, INC.

    Mr. Klink. Thank you.
    Good morning, and I would like to thank the panel for 
inviting me to be here today.
    My name is Thomas Klink. I am the president and owner of 
Jefferson Electric, Inc. Jefferson Electric has designed and 
manufactured dry-type transformers for almost 95 years. I have 
been employed by Jefferson since 1994, became a minority owner 
in '96 and majority owner in the beginning of 2008.
    During my tenure with Jefferson, sales volume has increased 
steadily, with a 300 percent total increase since 2001. During 
calendar year 2008, we achieved the largest sales volume and 
the second-largest profit volumes that we ever had.
    Also in 2008, the company was the recipient of a Future 50 
award, given to us by the Metropolitan Milwaukee Association of 
Commerce, indicating we are one of the Future 50 companies of 
southeastern Wisconsin.
    In January of 2008, when Jefferson was looking to redeem 
the ownership interest of the majority shareholder, original 
base lenders stepped up with funding that allowed us to do 
that, to do that with bank indebtedness.
    In April of 2008, Jefferson added a manufacturing facility 
in Mexico to take advantage of the favorable NAFTA regulations, 
reduce costs, and remain competitive. To fund this necessary 
expansion, we approached our lender and were provided with an 
adequate increase in our lending limits to complete that 
transaction.
    With this new production capacity and cost structure, 
Jefferson received the opportunity to increase its business 
with a brand-label customer. Part of the pre-qualification 
process was a representation that Jefferson maintain the 
financial capacity to support the increase in business if 
chosen as the supplier.
    In August of 2008, armed with the preliminary approval from 
our lender, Jefferson pursued the bid opportunity and 
ultimately was the winning bidder on the majority of the 
business from this Fortune 100 company. This represented an 
increase of more than 30 percent in the total sales volume of 
Jefferson.
    In September, needing formal approval on the increase in 
credit lines, the loan went to the bank's lending committee, 
where it was rejected. The committee supported its decision to 
reject the credit line increase by raising several issues.
    Collateral concerns. We were adding a Mexican facility, and 
the collateral was moving there.
    Growth concerns. The bank's outlook for the economic 
environment did not confirm Jefferson's growth plans. So they 
were concerned about the plan as presented.
    And leverage concerns. Due to the debt that was added from 
the redemption of the shares, the lender requested we find a 
third party to provide Jefferson with an equity infusion or 
debt financing subordinated to them.
    Since September, Jefferson has continued to meet with other 
lenders and investors. To date, nothing has come from these 
conversations for some of the same reasons as indicated by the 
lenders committee.
    From Jefferson's viewpoint, little or no relief has been 
afforded as a result of the TARP funding, whether the lenders 
have accepted funds or not. During November of 2008, the 
company again met with its lender. The company needed and 
received the support of the lender this time, with a small 
increase in the line of credit as long as it was supported by 
our borrowing formula.
    This increase was about one-third of the increase the 
company had previously sought but did allow Jefferson to 
continue to operate. This change only extended the line of 
credit into the middle of 2009, and the lender continued to 
indicate that an equity infusion was needed for Jefferson.
    Since September, Jefferson has been hampered in the pursuit 
of our strategic plan to profitably grow the company with new 
customers and new products manufactured the most cost-effective 
way possible. All of my available time since September has been 
spent working on funding the company rather than addressing 
opportunities to grow.
    Work that should be done now to afford growth at a later 
date is also on hold as we pursue external funding. Upon a 
successful long-term resolution to the funding issues, 
Jefferson should return to executing our strategic plan, a plan 
that includes investment in development of our products and our 
people.
    Over the past several months in meetings with investors and 
lenders, there is a lot of excitement about Jefferson, what we 
have done in the past and what we are going to do in the 
future. Jefferson needs a good long-term, stable relationship 
with its lender that will allow it to pursue the long-term 
objectives of the company.
    Although Jefferson will succeed, the anticipated relief 
from TARP legislation has not been noticed in our banking, 
vendor, or customer relationships. It is my sincere desire that 
this information helps the panel today to produce a better 
result for small businesses in the United States.
    Thank you.
    [The prepared statement of Mr. Klink follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The Chair. Thank you, Mr. Klink. I appreciate it.
    I want to go next, let us see, we have--I can't see. Mr. 
Atwell. I apologize. Oh, here it is. I had it written down.
    And I need to start out by asking is it ``Nico-let'' or 
``Nico-lay''?
    Mr. Atwell. ``Nico-lay.''
    The Chair. Nicolet, I apologize. I show my Oklahoma roots 
with that flat ``Nico-let''--and so, of Nicolet Bank.
    Mr. Atwell. That is the way everyone pronounces it outside 
Wisconsin.
    The Chair. Okay. All right.
    So, if you would, please, Mr. Atwell?

STATEMENT OF ROBERT ATWELL, CHAIRMAN AND CEO, NICOLET NATIONAL 
                              BANK

    Mr. Atwell. Nicolet National Bank is a $600 million 
community bank. Our customers are in the northeast Wisconsin 
region primarily.
    We formed the bank in 2000 to kind of consciously align the 
interests of shareholders, employees, and customers. Therefore, 
we have 260 shareholders. About 35 percent of the shares are 
held around the board table, and our employees own 10 percent 
of the shares outright.
    Many of our customers are shareholders, and most of our 
shareholders bank with us. In a rough sense, one could think of 
us as a commercial banking coop, except that we pay taxes.
    In December, we received a $15 million TARP investment, and 
we also raised $9.5 million of private capital at that time. We 
participated in TARP because we believe in its social purpose, 
and we thought it would be beneficial to our shareholders.
    We were and we are very well capitalized. We did not ask 
for and we did not need a bailout. Nicolet did not originate 
subprime loans. Since we own our own mistakes, why would we 
make them on purpose?
    We have a low concentration of development real estate as a 
matter of philosophy. We don't have any problem assets in our 
investment portfolio. Our risk is in the loan portfolio, where 
it belongs.
    We made money in 2008, and our nonperforming assets are at 
slightly over 1 percent. We did not pay management bonuses in 
2008 for the simple reason that we didn't hit our profit plans. 
We are in short position the way a sound bank should be on the 
front end of a recession, which is where we think we are.
    This recession has perhaps impacted our region differently, 
as you have noted. This crisis, the national crisis was 
confined to the real estate and finance sectors until September 
of 2008. In northeast Wisconsin, finance and real estate are 
really not core industries. They remain derivatives of the real 
economy.
    So right up until last fall, people may have been rattled 
by the news reports and maybe concerned about their 401(k) but 
probably privately wondered what all the fuss was about. In the 
wake of the Internet bubble and in the wake of 9/11, it was 
explicit Federal policy to flood the economy with liquidity in 
order to stimulate real estate development so that it would 
lead to recovery.
    Stimulus did, in fact, stimulate, and we were amazed at the 
scale of speculative real estate development in a market that 
historically had been a build-to-order market. Speculative real 
estate was really driven by a handful of developers and a 
handful of banks, all of which are problem institutions today. 
By 2005, we could observe the pattern of developers selling 
properties to each other in order to create appraisal equity 
for their lenders to lend against.
    After 2008, things changed. The recession bit hard and 
deep, beginning in October of 2008 in our area. Our traditional 
core industries of paper, wood products, food processing, 
shipbuilding, specialized equipment manufacturing, and 
transportation actually continued to show strength, but they 
comprise a much lower proportion of total employment than they 
did several decades ago.
    There are now a lot of competent, motivated people in our 
area without work. Unemployment exceeds 12 percent in the City 
of Green Bay, and this is a new problem for us.
    The future, we are planning for two scenarios. We are 
hopeful that a gradual recovery begins in late 2009. We are 
also doing our own private stress test, which I think all 
institutions should be doing. Our stress test in our area is 
what we call ``credit-driven stagflation.'' This would be 
characterized by a collapse of the U.S. dollar as global 
investors lose confidence in our national credit worthiness.
    The need to fund our structural deficits at the resultant 
high Treasury rates will make domestic private borrowing very 
expensive, and this stress would continue until global 
investors believe we have the political will to live in an 
economically responsible fashion.
    What are our responsibilities? We understand that banking 
is a private business and a public trust. We are lending money, 
and we are gaining new customers. Deposits are growing 
especially fast.
    We are also looking for acquisitions, which will strengthen 
our funding base. And we are aggressively seeking to tell our 
customers and our community how we see this crisis. Many of 
them have taken the tough measures necessary to manage their 
costs and strengthen their balance sheets. They are looking for 
opportunities beyond the moment, but, quite frankly, proceeding 
very cautiously.
    Many are concerned about the fiscal and monetary stability 
of the U.S. and quite concerned about an atmosphere of 
hostility toward businesses. We are concerned that the coming 
regulatory changes will tend to punish the horses that didn't 
leave the barn.
    Lastly, systemic risk. We must manage the risks created by 
the ``too big to fail'' institutions, the Toobtofs. Rather than 
seeking to manage the external social costs created by the 
Toobtofs, we would strongly urge you to consider using the tax 
code to minimize that systemic risk. Size serves no social 
purpose. Instead of spending more money to regulate, Toobtof 
taxation will generate revenue, reduce risk, and level the 
playing field, which has consistently favored the larger 
institutions in recent decades.
    Finance need not be as complicated as we have made it. It 
really ought to be a very personal, regional business, and we 
should adopt policy measures which decentralize the work, the 
ownership, the risk, and the return.
    [The prepared statement of Mr. Atwell follows:]

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    The Chair. Thank you very much, Mr. Atwell. Appreciate your 
comments.
    Mr. Perrins.

STATEMENT OF WAYNE PERRINS, GENERAL MANAGER, BADGER TRAILER AND 
                     EQUIPMENT CORPORATION

    Mr. Perrins. Thank you, Madam Chairperson and Mr. Silvers.
    I appreciate having the opportunity to serve here and to 
discuss the situation. Hopefully, we will all benefit from it.
    Badger Trailer is a third-generation, female-owned and 
operated Wisconsin business by Ms. Jean Lee, who is the owner, 
and her daughter, Ms. Karin Lee-Fournier, president. Jean's 
father, Mr. Lubbert Lubbers founded Badger Trailer in 1916.
    In approximately 1938, Mr. Lubbers became the first Thermo 
King transport refrigeration dealer in the United States and 
the world. As a Thermo King dealer, we sell, install, service, 
and repair all models of transport refrigeration equipment from 
Thermo King products and competitor products. We provide a 
complete line of repair parts for sale to the transport 
refrigeration industry and semi-trailer transportation 
industry.
    We are a complete semi-trailer repair facility, performing 
all aspects of repair and service in accordance with the 
Department of Transportation regulations. Our company has been 
actively involved in the Wisconsin business community, 
providing employment for Wisconsin citizens for almost 100 
years.
    We now find ourselves engaged in a fight to obtain credit 
and financial support to stay in business and not file 
bankruptcy because of our current uncooperative banking 
institutions' policies. Our banking institutions' officers, who 
are the decision-makers in our affair and who have refused to 
renew our loan obligations, stated to us in December of 2008 
that their institution received $1.5 billion from the first 
TARP disbursement under President Bush.
    Admittedly, there have been operational mistakes and 
complacency within our company for many years. After suffering 
continued loss of market share and revenue through the years, 
we reinvented and modernized our company in 2006 to be 
competitive in the 21st century market. Consequently, because 
of high fuel costs in 2007 adversely affecting our business and 
the transportation industry, the economic downturn in 2008, and 
the necessary modernization of our company, we incurred severe 
losses for 2007 and 2008.
    Our situation is urgent and time is of the essence as our 
financial institution has given us a very short deadline to pay 
approximately $2 million in loans, or they will call our loans 
and we will be placed out of business. None of our payments or 
obligations to our financial institution are behind, and they 
are the first ones to readily admit that we have not missed any 
payments. And we have made the necessary adjustments to lower 
our operating costs.
    We are currently working with the Racine County Economic 
Development Corporation, an SBA consultant, our attorneys, and 
our outside accounting firm to hopefully acquire an SBA loan 
for the portion of our loan obligation that was made for our 
new business construction in Racine County, Wisconsin. We are 
also actively pursuing a new financial institution with which 
to do our commercial banking, which proves pretty difficult.
    We have worked very hard and have initiated 20 to 30 years 
of needed improvements to our business practices in just 2 
years. We are finally poised to succeed as we move forward into 
the future. However, we need a willing financial institution as 
our partner.
    We have run out of time. Our financial institution is not 
extending credit and refuses to renew our loans, even though 
Badger Trailer is not behind in any payments.
    Our financial institution's attorney, our attorneys, our 
accountant, and our leadership team met on April 10, 2009, and 
verbally agreed on an extension to September 30, 2009, on our 
existing loans. To date, a written agreement has not been 
finalized. The attorneys are negotiating this.
    If the SBA does not fund our 504 loan in order for us to 
attract a new bank, which is imperative--we have to have the 
SBA 504 funded before a bank will consider working with us--our 
bank has stated they will not renew our loans or extend credit 
at the September 30th deadline.
    It seems that our financial institution's strategy is to 
close our company, and our financial institution has regularly 
threatened a lawsuit if we do not sign a formally proposed 
forbearance agreement. Our busy season is April through 
September for revenue proceeds. We need the time, and that is 
why we got the extension to September 30th.
    We do not have an effective line of credit. Our obsolete 
line of $300,000 is maxed out. We have developed a 
comprehensive and realistic cash flow budget with our outside 
accounting firm, and through the first quarter of '09, we are 
ahead of budget.
    We are working with other banks to develop a new financial 
business partnership. We have engaged a new legal counsel and 
are aggressively pursuing help through the Small Business 
Administration.
    Without financial support from the SBA and a cooperative 
financial institution, Badger Trailer and Equipment Corporation 
may not survive. We have overcome severe operational issues 
during the past 2 years, modernized the company, upgraded our 
performance, and are poised for a successful future in 
Wisconsin. We need support from the Emergency Economic 
Stabilization Act, TARP, and the SBA as a small business that 
has been in operation in Wisconsin for almost 100 years.
    We have held meetings with State legislators, Congressman 
Paul Ryan, Senator Russ Feingold's economic development liaison 
Ms. Hilary DeBlois, Congressman James Sensenbrenner, and sent a 
letter and a PowerPoint presentation to President Obama.
    We closed our Milwaukee operations completely and 
permanently, reduced operating expenses by elimination of 
utilities, phones, insurance, and all operating expenses there. 
The owner has made a firm commitment to sell all property in 
Milwaukee to pay down debt, which is valued at approximately $2 
million.
    We don't understand the unwillingness and adversarial 
attitude of our financial institution. We have initiated all 
the right actions to turn the company around. We need time.
    Thank you.
    [The prepared statement of Mr. Perrins follows:]

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    The Chair. Thank you, Mr. Perrins. Appreciate it.
    Mr. Prickett.

STATEMENT OF PETER PRICKETT, PRESIDENT AND CEO, FIRST NATIONAL 
                        BANK--FOX VALLEY

    Mr. Prickett. Thank you.
    My name is Peter Prickett. I am the CEO of First National 
Bank--Fox Valley.
    We are a full-service, community-based commercial bank 
headquartered in Neenah, Wisconsin. We have approximately $230 
million in assets. We serve the Fox River Valley, located in 
northeastern Wisconsin, with our primary geographic market 
along a 25-mile corridor of U.S. Highway 41. We have offices in 
Appleton, Neenah-Menasha, and Oshkosh.
    First National Bank--Fox Valley provides a complete 
offering of deposit and loan products and services to both 
retail and business customers. For retail customers, we provide 
conventional checking, savings, money markets, certificate of 
deposits, et cetera.
    We also offer a full suite of Internet banking services, 
including Internet banking, bill pay, and mobile banking 
capability. From a credit standpoint, we provide mortgage 
loans, home equity lines of credit, traditional installment 
loans, and credit cards.
    One of our primary strengths is serving businesses with 
depository services and credit needs in the amount of $500,000 
to $3.5 million. Our deposit suite for businesses includes 
conventional checking accounts, money market, overnight sweep 
accounts. From a technology standpoint, we also have full 
Internet banking functionality, automated clearinghouse, and 
remote deposit services to our business banking customers.
    Credit needs are provided through lines of credit, term 
financing, and real estate lending. We also provide financing 
to businesses through traditional and Small Business 
Administration loans.
    During this time of economic contraction, First National 
Bank--Fox Valley has remained active in providing credit and 
other banking services to the small business sector. Our 
underwriting standards have not significantly tightened. 
Current economic and sector conditions are considered in our 
underwriting process.
    However, each business customer is evaluated on their 
unique needs and prospective ability for repayment. As a 
community bank, our knowledge of the local conditions and of 
our borrowers' capacity and character remain paramount.
    As evidence of our commitment to our communities and 
borrowers, our bank has experienced solid and significant loan 
growth. Over the last two quarters, our loan portfolio has 
increased $20 million, representing a 12 percent increase. Over 
the last year, our loan portfolio has grown 20 percent.
    Of the $40 million in new loans that we made over the last 
two to three quarters, $32 million was issued to commercial 
lending customers in the form of traditional commercial and 
industrial credit, as well as for some commercial real estate. 
The remaining loan originations were to retail customers--$7 
million in real estate mortgages and $2 million in consumer 
credit.
    Above and beyond the statistics above, we also supported 
our existing customer base through renewal of credits totaling 
over $21 million. A total of 128 loans were renewed during this 
period, with over $18 million issued to business customers, $2 
million to residential real estate, and $700,000 to non real 
estate consumer lending.
    Our active pipeline of commercial prospects and enhanced 
business activity remains strong, showing the potential of over 
$30 million in new lending activity over the next 6 months. In 
addition to the residential real estate activity discussed 
above, we have also been active in supporting consumers with 
their real estate lending needs. We have originated 60 
secondary market loans for over $12 million since October 1st 
of 2008, although the majority of these were for refinancing 
activity.
    Recently, we have seen some improved, increased activity in 
the real estate purchase market. We have also purchased several 
million dollars of municipal securities issued by Wisconsin 
localities, again in support of our local economies. The 
ability to do this was enhanced by the acquisition of TARP or 
Capital Purchase Program capital.
    In summary, the TARP or Capital Purchase Program capital we 
obtained has already been leveraged almost three times based on 
our net loan growth and purchase of municipal securities over 
the last two quarters.
    That is all I have.
    [The prepared statement of Mr. Prickett follows:]

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    The Chair. Good. Thank you very much, Mr. Prickett.
    Mr. Griffith.

    STATEMENT OF DAVID GRIFFITH, OWNER AND CEO, CROSS TOWNE 
                           MACHINING

    Mr. Griffith. Good morning. Thank you for letting me be a 
witness to the oversight panel. I certainly appreciate the 
opportunity.
    Cross Towne Machining was started in 1989 and is 
celebrating its 20th anniversary this year. While our company 
does a wide array of machining, we specialize in precision 
machining and exotic metal machining. Exotic metals would 
include metals such as titanium, Hastalloy, cobalt, nickel, and 
Inconel.
    Our company serves many industries, such as food and 
sanitary, transportation, energy, military, and heavy 
machinery. Myself and another owner, Layne Meyers, purchased 
the company on February 1, 2007. Our purchase was financed 
largely by bank debt and owners' equity holdback notes.
    One of the reasons that we purchased the company is because 
we felt they had a strong niche and that there were significant 
growth opportunities within the industries they served. We 
found this to be correct early on.
    In 2006, which was the last year before we purchased the 
business, with the previous owners, Cross Towne Machining had 
$1 million in sales. By the end of 2007, which was our first 
year, we increased that to $1.9 million in sales, a 90 percent 
increase.
    In 2006, they had 11 employees. By the end of 2007, we had 
16 employees. We are growing quite well.
    And because of our results in 2007, we were also awarded 
the Future 50 award by the Milwaukee Chamber of Commerce. We 
are very proud of that.
    One of the challenges with the excessive growth is having 
working capital available to purchase the materials to machine 
the parts for our customers. As our company proceeded through 
2008, sales were still growing, but the burden on our cash flow 
from the significant amount of material being purchased was 
becoming a problem at our company.
    Sales continued strong through 2008, with the year 
finishing 15 percent above our 2007 sales results. But 
beginning in October of 2008, we were beginning to see a 
softening in our sales orders, and our customers were telling 
us that they were seeing it also.
    We had also borrowed, by that time, the maximum amount that 
the bank would loan us to this point. We are now struggling to 
pay vendors on a timely basis, and our company's growth was now 
being stalled by both the economy and our cash flow 
predicament.
    This is when I approached our bank, Johnson Bank of Racine, 
Wisconsin, about giving us some additional working capital in 
the amount of $75,000 and/or restructuring our current debt to 
help our now long-running cash flow situation. We had several 
meetings with them over the next couple of months. But by 
January of 2009, Johnson Bank informed us that they were no 
longer willing to do anything more for our company. They would 
not extend any more credit to us, and they would not consider 
restructuring our current debt with them.
    Soon after the decision from Johnson Bank, I began a search 
for a new bank, and that was six banks in the Milwaukee area. 
They were Associated Bank; Wells Fargo Bank; U.S. Bank; Mid-
America Bank out of Janesville, Wisconsin; Foundations Bank in 
Pewaukee, Wisconsin; and Investors Bank in Waukesha, Wisconsin.
    Between February 1st and March 31st of 2009, I met with the 
business bankers from each of those banks. The initial meetings 
were very positive. Several bankers showed me how our company 
could save $50,000 to $70,000 a year in debt servicing by 
having a relationship with their bank and their bank teaming up 
with the Small Business Administration through a 7(a) program 
that they offered.
    A couple of them also told me that we could receive some 
working capital through the 7(a) program also, which would 
alleviate our cash flow situation. These discussions, combined 
with the recently passed American Recovery and Reinvestment 
Act, had me hopeful that there would be a solution to our 
situation.
    I was told that the American Recovery and Reinvestment Act 
was established to encourage banks to do small business lending 
through the SBA by guaranteeing a greater percentage of the 
loan amount and waiving most of the fees associated with the 
program.
    Well, when the business bankers went back to their 
underwriters and/or loan committees for approval at their 
respective banks, the responses were not good. After a long 
discussion with one bank, they didn't want to pursue our loan 
situation further because, ``Our bank is only doing ultra clean 
loans.''
    One banker declined me by telling me that he ``has not had 
any loans approved in the last 3 months and that they need to 
be perfectly clean'' for his bank.
    Another banker told me that they would not approve my loan 
request. I asked him, ``If this was 2 years ago and our 
company's financial situation is exactly the same as it is 
today, would you do the deal?'' The banker replied, 
``Absolutely. But things are different now. The bank is more 
stringent.''
    When I asked a couple of bankers why they would not 
consider our company, even with the SBA 90 percent loan 
guarantee from the American Recovery and Reinvestment Act, the 
responses were, ``Just because the SBA guarantees 90 percent of 
the loan does not mean that there isn't a lot of cost to the 
bank if the loans default.'' Also, ``The SBA is not easy to 
deal with.''
    Another banker told me that there is so much paperwork and 
bureaucracy involved with the SBA that it is not worth their 
time.
    The last banker told me that a couple of years ago, his 
bank had to recover assets from a liquidated company with an 
SBA guarantee and, ``The experience really had our bank not 
look favorably toward SBA lending.''
    In the end, there were not any banks that were willing to 
underwrite my banking relationship even with an SBA guarantee.
    While the economy has affected our sales, we have 
aggressively managed our expenses, and Cross Towne Machining 
has had three straight quarters of operating profits--quarter 
three of '08, quarter four of '08, and quarter one of '09.
    But we are in a severe cash flow situation. We have not had 
any working capital for 7 months and have had to pay all of our 
vendors out of our cash receivables that we have collected. Our 
company is paying interest rates on our loans that average 8 
percent, which, by today's standards, are fairly high.
    We have explored capital investors, but the amount of money 
that we are seeking is far too low for capital investors to 
want to explore. Unless we can find a means to fix our long-
running cash flow situation, the future of Cross Towne 
Machining in this economic environment is bleak.
    Thank you for the opportunity.
    [The prepared statement of Mr. Griffith follows:]

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    The Chair. Thank you. Appreciate it, Mr. Griffith.
    I also understand that Sheila Payton is with us now? Is 
that right? We want to be sure to recognize her. She is the 
outreach coordinator for Congresswoman Gwen Moore, who was also 
very helpful.
    Thank you very much. I am sorry that I didn't include that 
earlier. But we appreciate your being here and appreciate your 
help in setting up this hearing and appreciate the 
Congresswoman's help. So thank you and please convey that to 
her.
    So what we would like to do now is just ask some questions 
while we have the record open, and this is helpful to us to be 
able to take things back to Washington. But we want to make 
sure--we are both going to be sort of going back and forth here 
with the questions. What I would like to do is to start with an 
overview question, if I could?
    We have five people here who have been in business or in 
banking for a very long time and representing institutions that 
have obviously been in business for, in some cases, many 
generations. What I would like to do is ask you if you could 
just set the scene for us a little bit?
    You have lived through other downturns. You know, life has 
not always been what it was in 2007 or you have been here for a 
long time. Can you say a little bit about--both here in 
Wisconsin and as you see it across the country, to the extent 
you are otherwise connected, a little bit about what you see as 
the depth and reach of the economic problems we are facing 
today? If you would be willing to do that?
    Mr. Klink, if I could just start with you? You are probably 
going to get stuck on all these at first. We will see if we can 
rotate that a little bit.
    Mr. Klink. I would appreciate that. We sell nationwide. Our 
trading market is the entire United States. And what we are 
seeing right now is a huge volume of quote activity. There is a 
lot of----
    The Chair. I am sorry, a huge volume of----
    Mr. Klink. Quote activity. We are one of the few 
manufacturers of dry-type transformers that will make 
nonstandard product. So we are seeing a lot of people come in 
for quote, looking to potentially reduce their cost structure. 
A lot of opportunity there.
    The other thing we are seeing is on standard product, a lot 
of people coming in looking for a better price, if you will, a 
lower quoted price. Our quote desk has never been busier. Those 
quotes are not turning into orders, and the feedback we are 
getting from the distributors out there is the projects are 
being held up because nobody can get any money.
    They have a building on the books. They have a machine on 
the books. They have an expansion on the books. And the money 
is not available to them to do that. So we are--our sales 
volume, our growth is tied a little bit to the commercial 
industrial sector. We fortunately have had no product in the 
residential side of things. So that, I can't comment on.
    But what we are seeing this time around is, again, there is 
a lot of demand. It is just not turning into orders. Overall, 
Jefferson, I have been involved with it since 1994. This cycle 
downturn is a little bit different in that in previous 
downturns, we did not see that quote activity.
    The quotes started falling off, and you could start to plan 
for things to get slower 3 to 6 months from now. There is still 
a lot of--this time around, there is a lot of activity yet, 
indicating to us that there is still demand. It is just that it 
can't get funded. Big difference this time around.
    The Chair. Very interesting. Thank you.
    Mr. Atwell, could you say something about how you see it?
    Mr. Atwell. Yes. And again, my focus is northeast 
Wisconsin, which is somewhat different than southeastern 
Wisconsin. We are historically a very recession-resilient area. 
That is partly due to the nature of the industries there, 
partly due to the characteristics of the people. Generally, 
historically, a very strong work ethic and not given to 
irrational exuberance and, therefore, typically not suffering 
from when bubbles burst.
    '91, '92 and 2001, 2002 are the last national recessionary 
periods, and I would say the impact in northeast Wisconsin was 
relatively muted. Clearly not this time, and I am a little bit 
at a loss to explain why.
    There is part of me that has got sort of the Midwest 
populist streak, I guess, that we are kind of used out here to 
problems being generated elsewhere and having to participate in 
the cleanup of parties that other people enjoy. We kind of know 
that. We are not that stupid that we don't see it happen.
    This is just radically different, and I guess the best 
observation I can make is that something very dramatic happened 
in the '90s. From the mid '90s on, we experienced just a 
radical outsourcing of the diversified manufacturing, 
traditional base of business in Wisconsin, and lots of us asked 
what is the new emerging core industry that is going to replace 
all these things that people did and built?
    And so, we have lost kind of a bit of that base. And we are 
not here to address trade policy, but one has to wonder whether 
our free trade policy has really been based on freedom or 
whether we have not, in fact, outsourced employment to places 
that don't enjoy the freedoms we do. That is maybe a bigger 
subject than we have here.
    But clearly, the proportion of people employed in our 
traditional industries is substantially lower today than it was 
then, and clearly, our employment base is much more fragile and 
the problems are much deeper. And to a great extent, when I 
listen to the stories here from my fellow witnesses, there is a 
sense in which our State is suffering from a party we didn't 
participate in for the most part.
    The Chair. Thank you very much.
    Mr. Perrins, please ignore the red light. I didn't tell the 
people who are doing timing. We are just going to go back and 
forth and not pay attention to that.
    Mr. Perrins. Does that mean I should ignore it when it 
comes on? [Laughter.]
    The Chair. So, please, Mr. Perrins, we would like to hear 
your point of view.
    Mr. Perrins. Our industry is also a nationwide, actually 
worldwide. But the transport refrigeration industry has been 
impacted by--well, in '07, the high fuel costs dramatically 
affected the trucking companies and the ability for them to 
keep vehicles on the road, the refrigeration units that run 
diesel. High costs there impacted our industry and our ability 
to sell more products.
    Like Mr. Klink, a lot of quotes, a lot of proposals for new 
equipment. However, because of the credit issues, banks not 
lending for whatever reason, a lot of trucking companies have 
either gone out of business, parked rigs up against the fence, 
and have not expanded.
    Then 2008, with the subprime problem and the nationwide 
issue, that also affected our business. It just seems that the 
overall economic situation, I have talked to other dealers--our 
manufacturer Thermo King is firmly behind us. In fact, they 
just gave us a 3-year dealer agreement. They are a very good 
corporation.
    But other dealers across the Nation are experiencing the 
same issues of unit sales, trucking companies that need to buy 
new equipment, the Clean Air Act. CARB starting in California, 
which is migrating east, is affecting a lot of manufacturing. 
We have had to upgrade our equipment to comply with that 
regulation, which means that the trucking companies and owner/
operators have had to buy new equipment. If they don't have the 
funds to do it, it negatively impacts us and every other 
dealer.
    Now there are pockets of success stories here and there, 
but overall, we believe that if this TARP and this economic 
stabilization process is brought down to the small businesses, 
be it a Badger Trailer or an owner/operator or whoever, and it 
is a viable business, that the economy should turn around. I 
don't see it and many of the colleagues that I talk to across 
the United States have not seen it affecting their businesses.
    So the issue with credit, I believe, is the underlying 
factor with companies going out of business, people losing 
their jobs. The home mortgage problem--people lose their job, 
they can't pay their mortgage. It is just a large ripple 
effect.
    The Chair. Got it. Thank you.
    Mr. Perrins. You are welcome. Thank you.
    The Chair. Thank you.
    Mr. Prickett, could we hear from you on this?
    Mr. Prickett. I think the recent recession was certainly 
deep and fast. However, I think there could have been 
opportunities to come out of it quickly, as I think our first 
witness said, and I would echo that. Our borrowers have 
indicated that they have requests for quotes and a lot of 
potential activity. But there is a fear all the way up the 
chain to make a move.
    Could some of this be associated with the lack of credit? 
Possibly. But a lot of it is just uncertainty. And a lot of 
this uncertainty, as my clients tell me, is not just the 
economic uncertainty, but regulatory uncertainty, tax policy 
uncertainty.
    This will stop your average businessman from investing more 
of his capital and going forward if he is not sure of the new 
regulatory or tax burdens that are on him. And it will also 
cause banks to question further as we look at extending credit 
because we don't know what the regulatory burdens will be on us 
or on our customers.
    So there is potential out here. We are not making any less 
people, which means overall demand will have to go up and pent-
up demand will be evident. Will we clear the way for economic 
activity to forge ahead?
    The Chair. That is very helpful. Thank you.
    Mr. Griffith.
    Mr. Griffith. Yes, within our industry, what we certainly 
see, and I concur with several of the comments, is the 
uncertainty of the recovery. Our customers are--their 
inventories are down to the ground. They have really reduced 
inventory, and they really are ordering now on an as-needed 
basis at the time that it is needed.
    And a lot of that, when we talk to them, points back to I 
don't know what things are going to look like 3 months, 6 
months, 9 months from now. So if I have an order coming in 
today, I will call you and place the order, and that is when I 
need the parts.
    Our industry as a whole, obviously, over the years, has 
been hurt a lot by overseas, the machine tool and die industry. 
And one of the things, though, that we are seeing, especially 
in the smaller machining companies like ours, is the larger 
companies that are doing combining and very aggressive 
inventory, they are pushing that down now even to the smaller 
companies.
    Where years ago, many machine shops were provided with the 
material, provided with the castings to do the machine, now it 
is go out and purchase all of that for us and then just give us 
the finished product at the end. So we have seen a lot more 
pushdown of inventory and material purchasing over the last few 
years that I think traditionally hasn't been there as much.
    But overall, it is definitely the uncertainty of the length 
of the recession. We used to get forecasts from our customers 
on a 1-month, 3-month, 6-month basis. We don't get any more 
forecasts at all anymore for sales. It literally is, ``Next 
week, we need this.'' Or, ``Two weeks from now, we need that.''
    The forecasts, if they do come out, they are not accurate 
at all. It is kind of pie-in-the-sky type of forecasting, and 
that is kind of the environment we are in now. And no one can 
really say when we are going to come out of it.
    The Chair. Thank you.
    Mr. Silvers.
    Mr. Silvers. Thank you.
    First, I just want to say I thought that set of comments 
was extremely helpful. It is precisely the sort of thing that 
we come here to learn about. It is very difficult to get that 
sort of grounded experience in these sorts of processes in 
Washington.
    Let me begin by asking you this. There has been a great 
deal of debate, and I am sure you all are somewhat familiar 
with this, as to the cause of the credit crunch for business 
and the cause of the sort of data the Wall Street Journal 
reported, 24 percent fall in lending by banks to businesses.
    On the one hand, there is the argument that banks are 
simply not providing the credit, that the door is closed to 
anybody. And there are many explanations given for that, but 
that is that argument.
    On the other hand, there is the argument that essentially 
the credit quality of borrowers is deteriorating, and banks 
have no choice but not to lend to borrowers who it would be 
imprudent to lend to and that that is the result of the overall 
deterioration in general economic conditions.
    I am not going to make all of you answer this question, but 
I would be happy if you did. How do you--in looking at that 
dichotomy, are those the right set of choices? Is one clearly 
true and the other not true? Are both true?
    And what are the policy implications of the truth? Meaning, 
if one balances those things, what should that mean in terms of 
the way in which the Treasury Department and the bank 
regulators handle the authority and the money they have under 
the bailout bill?
    Mr. Perrins. Anybody?
    The Chair. Anyone.
    Mr. Silvers. Feel free. Step forward.
    Mr. Perrins. Well, listening to the national news and 
hearing all of the stories about the big auto companies and the 
financial institutions that have gotten billions and billions 
of dollars. You know, too big to fail? We are too small to 
fail.
    I think that a bank--and I may be naive in my thought 
process here, but if a company who has made all the right 
moves, have downsized, and I have heard all of these people on 
the national news testify in front of the Congress about 
downsizing, not taking pay bonuses, et cetera, et cetera. We 
have done all of that at Badger Trailer.
    Admittedly, in the process of modernizing the company, 
there have been losses in the last 2 years. It has been a 2 and 
\1/2\ year process to upgrade our company. Well, our banking 
institution has stated that they can't--they don't believe that 
the company will survive so they are not going to extend the 
loans.
    Well, that is a double-edged sword. If a bank tells a 
company we don't think you are going to survive, although we 
have broken even and are ahead of our budget so far this year, 
you are going to collapse. You are going to not be able to make 
your payments without operating capital.
    So I don't understand if a company is in good standing, has 
made their payments, has done all the right things, is not a 
good risk. I don't know if that answers your question. I don't 
know what a bank--and maybe these two gentlemen can explain 
that. What is a good risk? What isn't a good risk?
    Another question I have is in our process, our bank is 
pushing us to find another bank. In the event that the SBA 
funds the 504 loan, which we have got an extension until 
February 2010, all banks are looking for that 504 funding 
before they will talk about taking up any of the other loans.
    The family has, like I said in the opening comments, 
approximately $2 million in collateral that is in Milwaukee. 
Well, if we find another bank and takes the loan and the 
liabilities from our current bank, our current bank wants to 
hit us with prepayment penalties. Now does that make sense?
    Now I spent 20-some years in the Army, and that, to me, is 
un-American. Forcing you to get another bank, and when you do 
get another bank, you get hit with prepayment penalties because 
the new bank--I mean, what--I don't know if that answers your 
question, but----
    Mr. Silvers. It is certainly relevant, but I invite other 
responses.
    Mr. Atwell. I would like to--I think it would greatly aid 
our thinking on this matter if we could realize that the vast 
majority of the TARP money went into banks not so much to 
stimulate tomorrow's opportunities as it did to pay for 
yesterday's mistakes. I just think that is one of the unspoken 
elephants in the room that needs to get out on the table.
    So if your bank--and the other thing that I think we have 
got to keep square in front of us is this crisis was caused by 
easy money loaned by those institutions who are now flat on 
their back at a time when we are facing a recession. And if 
they needed TARP funding to pay for all the easy money they 
dumped out on the street several, 3, 4, 5 years ago and they 
are not prepared to assist their customers through a recession, 
I just think they are not in the position they need to be to 
help their customers during difficult times.
    And I guess maybe another truth is the banks that are not 
entering this recession flat on their back had to exercise 
quite a bit of discipline in '04, '05, '06 when everybody 
thought we were stodgy and stupid for not dumping money out the 
way everybody else did. So we are going to go through the brain 
damage of preparing ourselves for tough times in order to fix 
other banks' problems.
    Our first responsibility is to our customers and to our 
shareholders to defend the value that they have invested in our 
institution, and our voluntary participation in TARP doesn't 
affect our fiduciary responsibility to our customers and our 
shareholders.
    We are actively looking at other situations. We are looking 
at new customers, but we have to have the conversations. What 
you need, what borrowers need is a bank that has the discipline 
to keep its head screwed on straight while the party is going 
on so that they have a bank that will work with them when it is 
not.
    And I am sure Peter, well I don't want to speak for Peter, 
but our bank, we have $460 million of assets loaned primarily 
to businesses, and these stories sound not all that different 
than a lot of what our customers are going through. Our first 
responsibility is to be working with them through tough times 
instead of kicking them out.
    So are we selectively looking at new opportunities? We are.
    And the last comment I want to make, since you have invited 
commentary, is I really think, the main thing is how do we 
recover today? But there is a much more important debate, which 
is what have we learned about how we got here?
    And I firmly believe that the regulatory framework has 
favored the aggregation of risk and the minimalization of 
capital in the large institutions. And I am very fearful that 
the regulatory lessons we are going to learn are going to have 
as an unintended consequence the further aggregation of risk in 
those institutions.
    Mr. Silvers. And why do you believe that?
    Mr. Atwell. Because I believe that an intense----
    First of all, large institutions tend to develop a core 
competency in regulatory compliance. My first job out of 
college was working for Cummins Engine Company. I was an intern 
in their environmental policy group. They were the largest 
manufacturer of over-the-road diesel engines then, and I think 
they are today.
    We had a seven-person environmental policy group. They were 
very good people, very serious about working with the EPA. They 
were also the largest in the industry and best at it, the one 
that was most consulted by the regulatory authorities in 
designing the regulations and the one that had the most volume 
to spread the cost of regulatory compliance over.
    And all I am saying is that regulation is a form of 
taxation. I am not arguing against it. I am saying we have a 
lot of regulation, and I had a very telling conversation with a 
regulator I have known well. I asked him, ``What happened? You 
guys had 40 or 50 people at Citicorp or Chase or any of these 
other organizations. What happened?''
    He looked at me, and he said, ``Bob, I don't think 
management knew what was going on.''
    The organizations are too big, nobody understands them, and 
we don't understand that we have policy measures which favor 
the creation and the maintenance of large organizations.
    Mr. Silvers. That is very helpful. I would recommend to you 
this panel's regulatory reform report. One of the leading 
recommendations in that report is that rather than name 
specific institutions as systemically significant, which I 
think we all understand to be code for too big to fail, that 
rather than do that, we ought to have a capital regulatory 
scheme and a tax regulatory scheme and an insurance regulatory 
scheme. By insurance, I mean FDIC insurance scheme that 
ratchets up as you get bigger, and I think this is pretty much 
precisely, Mr. Atwell, what you were saying.
    As you get bigger, those costs increase, both in order to 
counteract all the dynamics you were talking about from a 
competitive basis, but also to ensure that if one of these 
large institutions does blow that we have the adequate 
insurance funds, essentially, to deal with it.
    Mr. Atwell. I think that is a very sound direction. I think 
it is good to think--you know, we had to compete against those 
institutions in 2005 at a time when they enjoyed implied 
capital support from the Federal Government and at a time, by 
the way, when I think the official Federal policy was there 
were no too big to fail institutions. But everybody knew there 
were, which is kind of why I would respectfully--am I allowed 
to respectfully disagree with you?
    The Chair. Of course, you are.
    Mr. Atwell. If we got them, name them. I don't care if they 
are an insurance company, a car company, anything. Name it. If 
it is too big to fail, it poses an external social cost. It 
ought to be named and taxed and treated appropriately.
    The Chair. Right. Actually, let me just add to what Mr. 
Silvers said. The report is available to anyone who wants to 
look at it online. It is at www.cop--C-O-P, which is our 
acronym, Congressional Oversight Panel--so www.cop.senate.gov. 
And there is a whole list of the reports.
    So all of our monthly reports are on there, but, in 
particular, our regulatory reform report. You can pull it down. 
It is free access to anyone. You can download it. There is even 
a video that talks about what some of the reforms are.
    But I will say this. It aims very much in the direction you 
are talking about. We cannot have--this was the recommendation 
of the Panel--these implied guarantees for which the people who 
will never be the beneficiaries of those implied guarantees, 
that is, the smaller institutions, end up bearing the cost and 
those who are imposing those risks on the rest of the economy 
end up bearing the benefit.
    So I think that is a good point. Did you want to go on, 
Damon, or----
    Mr. Griffith. Can I answer your question real quickly?
    The Chair. Go ahead, please, Mr. Griffith.
    Mr. Griffith. My thoughts are when you talked about are the 
banks too tight or is there deterioration in the companies, 
there clearly are businesses such as mine whose sales have 
declined over the last few months. And as I talk to bankers, 
and they would say, ``We are concerned your sales are down 20 
percent. You have a high amount of debt. That is an issue.'' 
There is no doubt that there should be concerns there.
    That being said, though, what my experience has been in 
talking with the bankers is that they are not looking for 
solutions to make the deal work. I have heard banks say, ``Yes, 
we are, yes. Yes, this is what we want to do.''
    Bankers, my impression is that if it is not a solid deal, 
they are not interested. It is not a, ``Let me look at it and 
let me talk to the SBA. Are there other avenues that we can 
explore? We may not be real comfortable with it, but there 
might be other things that we can take a look at.''
    It clearly is, ``Our bank is not, in this environment, 
comfortable with your situation, and we are not going any 
further.'' That has been my frustration with the situation.
    The Chair. What is your sense of--I take it this is a 
significant change----
    Mr. Griffith. Right.
    The Chair [continuing]. Than, say, a year ago, 2 years ago.
    Mr. Griffith. Two years ago, mm-hmm.
    The Chair. What is your sense of why that change is there?
    Mr. Griffith. I believe that--my impression, whether it is 
right or wrong----
    The Chair. That is all I am asking for.
    Mr. Griffith. Banks are obviously scared of the losses that 
they may incur. They don't want to look at companies that could 
possibly be another loss in the future and, as a result, I 
think are content to not be in the lending mode at this 
particular time until the economy fixes itself, things shake 
out, and things go their separate ways.
    But we have had three straight operating profits. And yes, 
our sales are down, but we are managing expenses. And I talked 
to bankers and said, look at--you talk about character and 
things like that. Look at the management team of the business, 
and are they doing the right things?
    Obviously, the economy is impacting many businesses. There 
is no two ways about that. But go beyond the net income. Look 
at is this business viable? Is the management team strong? Are 
they doing the right things? Those are things that they 
absolutely are not looking at this point in time.
    The Chair. I would like to focus, if I could, on Mr. Atwell 
and Mr. Prickett, just for a minute. To ask a question, you 
both took TARP funds?
    Mr. Prickett. Yes.
    The Chair. And you explained a little bit about the reasons 
why you took the TARP funds, what you thought was appropriate. 
If I could, just for a minute, what do you think has been the 
consequence of taking those TARP funds? Did it work out the way 
you expected? Are you glad you took the funds?
    You know we are here to talk about how that program is 
working.
    Mr. Prickett. Sure.
    The Chair. And so, I would like both a ground view, and 
then, if you can, we will go to the next question about 
comparing the differences in experience.
    Mr. Prickett. In one respect, we are pleased we took the 
funds. We took it with what we think all the right reasons 
were. We were encouraged to take it. We were encouraged to take 
it to use it to fund lending, to fund growth in our bank. Good 
growth, careful growth, as Bob said.
    But we didn't need the capital either at my bank, as Bob 
did not. So he is absolutely dead on that we took the money not 
to patch a problem, but to try to do the right thing. And I 
believe both of our banks have. We have both shown it through 
our loan growth.
    And I feel poorly for my fellow witnesses for their 
particular travails. I can't obviously speak to them. Our 
particular philosophy is we make money by lending money. We are 
not unlike any other business. So do we have a risk issue that 
other businesses may not? We do, but we are actively seeking 
where we can help our communities and our borrowers at an 
acceptable risk with an acceptable return.
    That is the bottom line for us, and I think Mr. Atwell also 
states it eloquently that the large banks, as you have said, 
there were four banks controlling 50 percent of the market. 
Their impersonal delivery or inability to personally get 
involved at the grassroots level, I think, is a systemic issue, 
causes them to do things in bulk and in excess.
    But down here in the community bank level, I can assure you 
that the majority of our community bank counterparts are 
actively involved in their community and looking for 
opportunities to constructively move forward.
    The Chair. Mr. Atwell, can you just spend a minute talking 
about your experience with TARP?
    Mr. Atwell. Yes, we voluntarily participated. Again, we 
raised private capital along with the TARP, a lot of which came 
from around the board table, basically came out of our 
community, people who believe in the mission.
    TARP hasn't exactly worked out the way we thought. The 
finances of it are fine. It essentially costs us 8 percent 
after tax or pre-tax equivalent. And I don't think the public 
can understand we are paying for it. It costs us $80,000 a 
month roughly, $75,000, $80,000 a month, and I think they are 
used to thinking of it as a bailout. I don't blame them for 
that because, quite frankly, for most of the institutions that 
received it, it is a bailout.
    And maybe we were not--did not think enough about the 
public perception of the whole program. I can tell you about 
every other week, I get another letter from some office I have 
never heard of with all kinds of questions about what we are 
doing with the money and this and that.
    And I think you are aware there have been some unilateral 
changes to the contractual arrangements we entered into on 
December 23rd, specifically attempting to insert themselves 
into a matter that is board controlled relating to our 
compensation philosophies and all those kinds of things. And 
that, I would be--to be candid, that is very troublesome to our 
board and to myself.
    The Chair. If you were redesigning TARP from the beginning, 
what would you have done differently about it? Or what would 
you do at this point?
    Mr. Atwell. I think the idea is fundamentally sound. I 
think what was lacking is the candor that most of the 
institutions who took it needed a bailout, and it should have 
called as such. And differentiate between those institutions 
that are really doing it to serve a social purpose, namely to--
I mean, what is the social purpose? If it is costing me 8 
percent a month to have $15 million invested, I have got some 
pressure on me to actually generate a return to our 
shareholders.
    Now most of the things we might actually do to generate a 
return for our shareholders would--you know, if I said, for 
example, I am going to buy a troubled bank. ``What do you mean? 
You are using bailout money to buy a bank?''
    The public would not understand, and I understand why they 
don't understand. I don't think they have really been told the 
truth. Or if they have, it has been told very slowly, in a very 
veiled way.
    Mr. Perrins. I have a question.
    The Chair. Mr. Perrins?
    Mr. Perrins. Yes. Our bank, and it came from two bank 
officers, got $1.5 billion under the first. I mean, that is a 
lot of money. Allegedly, it was used to fix some of their own 
mistakes internally in the subprime issue in the Southeast and 
out West.
    If that is what it was for, that is fine. But what is the 
new process under the present administration supposed to do 
when millions of dollars have been assigned allegedly to the 
SBA to help banks help companies like ourselves who are viable 
and have a good future to succeed?
    I mean, I don't understand it. I really don't. And anyone 
that I speak to in my area doesn't understand it either. If the 
money has been given to the SBA to guarantee loans to the 
banks, why aren't the banks giving small businesses that have 
done all the right things--downsized, lowered their operating 
expenses, the whole nine yards--why aren't they helping them 
succeed?
    The Chair. Thank you, Mr. Perrins.
    Mr. Silvers.
    That is very helpful, by the way. Thank you very much.
    Mr. Silvers. Just two comments before my question. First, 
Mr. Atwell, your comment about candor. Again, this panel's 
February oversight report, again, available on the same Web 
site, was a look at the--frankly, in my opinion, this is my 
view of that report--a look at the financial consequences of 
the lack of candor.
    We looked at the subsidy given to weak institutions who 
were given money under the pretense that they were strong and 
under terms that were given to strong institutions. And when 
you do that, you basically give away the public's money. And we 
got the best people in the world to price it, and we put a 
price on what lack of candor cost the United States.
    Mr. Atwell. I am glad to hear that.
    Mr. Silvers. And our power is the power of the pen. We can 
tell people what has happened. That is what we did. But I could 
not agree with you more about the issue of candor in the 
structure of TARP.
    Secondly, this hearing is about small business and business 
finance, and we are sticking to our knitting in this hearing. 
But I can't help but comment because it has come up a couple of 
times, and I know that it is a reality here in Milwaukee, that 
there is another whole issue about subprime and about people 
losing their homes. And this panel is extremely focused on that 
other than today, and our report on that subject is our March 
report.
    And so, if there is anyone here in the room, in the 
audience for whom that is the primary focus, understand it is 
ours as well, but not today.
    Let me come back again to the sort of line of discussion we 
were just having. I am very appreciative, and certainly my 
appreciation for this has been heightened by the testimony so 
far, that you cannot ask--you cannot fundamentally ask private 
firms to lift up our economy at the expense of their 
shareholders, the people that fiduciary duties are owed to. It 
is just not fair. It is just not how things work, at least not 
directly.
    There are ways in which we can use public policy to 
facilitate some win-win situations, but I am very appreciative 
of Mr. Atwell and Mr. Prickett's testimony about their 
responsibilities. But it seems to me that we have--the 
testimony thus far describes a common pattern among the small 
business people present at the table, which is that each of 
your firms in different ways sought to expand or modernize 
operations during a good time. The good time being 2006, 2007, 
2008.
    And that during--and that as a result and then partly Mr. 
Griffith talks about issues of inventory finance being pushed 
down. There are some other outside factors. But essentially, 
you were in a position where you needed stable, long-term 
financing at a time when suddenly it wasn't available.
    Now my question is we have done through TARP, in a number 
of ways people have commented that the Treasury Department and 
the Federal Reserve have created essentially parallel credit 
markets in a number of areas, in credit card issuance, through 
securitized offerings to the TALF program, and to some 
significant degree in mortgage finance. In a variety of areas, 
we have created parallel credit markets and tried to bypass or 
reform markets, credit markets that are frozen.
    In looking at the problem--and I am asking this of not just 
the three small business people, but also the two bankers at 
the table. In looking at the problem defined by these three 
firms in common, which is this problem of having set expansions 
in motion, needing long-term credit, and facing serious 
uncertainty, and taking at their word that their firms may face 
failure and that we will see significant job loss, and 
aggregating that pattern, we will see significant problems, 
what is the right policy response here?
    Is it to ask more of the banks, particularly community 
banks, such as yourselves, at the table? Is it to ask more of 
the big banks? Should we be thinking about a kind of parallel 
Government-sponsored credit market for these types of 
situations? Is the real problem here that small businesses in 
these circumstances need equity, not credit?
    I put those possibilities on the table, but I am open to 
others. Tell me what you all think.
    Mr. Atwell. Wow, that is a lot.
    Mr. Perrins. We are working, and I had a discussion with 
the vice president of a bank that is very favorable towards our 
future. His primary concern is the SBA funding that is about 
$640,000, the portion of the construction loan to build the new 
facility. Once that happens, they are willing to work with us 
to provide commercial credit.
    And I must say, the man is an honorable man, and I hope we 
can pull this off. But I think banks are really leery of taking 
on complete debt. And that is at least the gentleman's 
expertise.
    But there has to be some way through TARP, the 
Stabilization Act, through the SBA to help small businesses 
work with a banking institution to provide the funds needed for 
operating capital, payroll, inventory, the whole nine yards. 
And I don't know that that is happening to any degree that is 
helping small businesses.
    So I don't know what the Federal Government can do about 
that. I hear what is said on the news. What is said on the news 
and what is happening out here are two different things, as far 
as I am concerned. So that is my point of view on that.
    Mr. Atwell. I think there is this whole question of 
distressed debt and the market for distressed debt. There has 
to be a solution in there somewhere. We see it in real estate. 
I am familiar--a guy I serve on a board with is out in 
Michigan. He is a real estate developer. Does $200 million, 
$300 million worth of projects.
    Here is a guy who was financed not by a bank, but by one of 
these big--I don't want to name names, but a real estate 
lender. Wanted out of the project, $23 million note. After 2, 3 
months of negotiations, he bought his own note back, his own 
$23 million face amount note back from that institution at, I 
believe, a $10 million price with financing from another 
institution.
    So the policy implications of this isn't, number one, 
banks--there needs to be a recovery of the banks' fiduciary 
sense of responsibility to its customers. And to a great 
extent, this crisis is housed in a collapse of that fiduciary 
responsibility.
    Mr. Silvers. Can you expand that a little bit? Talk about 
that.
    Mr. Atwell. Well, just look at subprime. I mean subprime, 
in a sense, is an offense against the borrower. When a lender 
makes a loan that they ought--either know or ought to know the 
borrower can't repay, there is something fundamentally morally 
wrong with that, not just economically wrong with that. It is a 
betrayal of your fiduciary responsibility to the person who you 
are supposed to be serving, whether it is a person or a 
company.
    So this isn't going to help guys who are on the ropes right 
now, but banks ought to when they make a loan, when I make a 
loan--and we do make bad loans sometimes. We make loans to 
companies that don't work out. We don't always--at the end of 
the day sometimes, we collect them.
    But by and large, we have a fiduciary responsibility to try 
to work with that borrower. Why? Because we made the loan.
    Now maybe more practically, if we have banks that are so 
absorbed with their own problems that they don't have the 
patience to work with the people that they put in a leverage 
position a year and a half ago, we ought to have policy 
measures that facilitate a transference of that risk. Because, 
quite frankly, some of those banks may have written those loans 
down. They might be happy from the standpoint of their math to 
sell those loans at something less than 100 cents on the 
dollar.
    How does the Federal Government approach that from a policy 
point of view? I don't know. But a loan that I might not make 
at 100 cents on the dollar, I might well make at 50 cents on 
the dollar, and it might be a good decision for our 
shareholders. And it might serve the interests of the borrower, 
and it might solve a problem for the bank that is apparently so 
up to their eyeballs in their own problems that they don't have 
time to deal with their own customers.
    The Chair. Please, Mr. Klink.
    Mr. Klink. From the Chair, going back, I think, to your 
other question as well as this, trying to tie them together, 
what seems to have happened in the case of Jefferson Electric 
is the bank changed the rules and didn't bother to tell 
anybody. A loan that 8 months ago they seemed perfectly happy 
to make to redeem the majority shareholder, 4 months after 
that, adding a capacity to that loan to facilitate the 
acquisition of an operation in a lower cost environment, 
Mexico, suddenly became an issue.
    And it wasn't an issue in August when I asked them for 
approval to bid on a contract, but it became an issue in 
September. Something happened in there. I don't know what it 
was. And since that time, the struggle that I have had in 
talking to other lenders is the rules seem to have changed for 
everybody. Any bank that I have talked to has pointed out the 
same issues. ``Your collateral is in another country.''
    I am sorry. It is four miles in another country. We have 
become a global economy. We have to find a way to collateralize 
that and allow me to borrow against it. There has got to be a 
way to do it. It is not a third world country or the end of the 
world. It is four miles away. They have identified a way to do 
that. The indication then was, ``Well, we don't want to because 
the legal cost to get it back when you fail, if you fail, is 
too much. So we are not going to do it.''
    A loan ratio, a debt-to-equity ratio that they were happy 
with and a timeframe to work it out in early 2008 suddenly 
became unacceptable. And I am being told, ``You need to sell 
part of your company.'' At a time when I was out there looking 
to grow the company, incurring extra costs, going out and 
talking to investors at that time, the ratios are wrong. The 
amount of company I have to sell is inflated, the percentage I 
have to sell is inflated to entice somebody.
    I think, Mr. Silvers, you indicated is investment needed? 
Yes. I think in a company like mine, there is some investment 
that is needed. I don't--I guess the issue I am having is being 
dictated to that I need to bring in an investor, and the 
investors that are out there looking to take advantage of that.
    I had one investor that said, ``Sure, I will take your 
company. Bring along a check for $2 million, and I will do 
it.'' [Laughter.]
    Not an answer.
    The Chair. Right. If I can, I want to just slightly modify 
and sharpen the question that Mr. Silvers was asking in a 
somewhat different way. If you think of the Government has 
having only a limited amount of money that----
    Unidentified Speaker: Do they?
    [Laughter.]
    The Chair. That is why I paused. You noticed I paused 
before I started this question.
    So this is a question about where you concentrate resources 
if you are trying to get small businesses, you are trying to 
help small businesses survive. You are trying to keep them up 
and operational.
    So we talked a little bit about the difference between 
concentrating resources by actually using it to pay off 
yesterday's mistakes, to subsidize, to bail out companies, 
financial institutions that made mistakes in the past versus 
putting money in that genuinely is designed to try to support 
additional lending and to try to move forward. But I want to 
ask the question in two other ways, in addition to the 
subsidization question.
    The question about the difference between putting money in 
large financial institutions and small financial institutions, 
and other than subsidization, there may be no difference. I 
just want to ask this. And then the notion of whether or not 
Government resources, instead of going directly into financial 
institutions, instead should be used, as you may have heard 
about with TALF in another one of these Government acronyms, to 
try to stimulate securitization of small business loans, which 
would be an alternative way for the Government to try to 
infuse. Or I say alternative. Obviously, you can pursue them 
simultaneously, but there are only so many dollars to go around 
here.
    If you could speak to that, what kind of differences we 
might see, depending on where the money goes? That could be 
very helpful. Mr. Prickett, Mr. Atwell, or anyone else who 
would like to talk about this?
    Mr. Prickett. Securitization right now is probably--may not 
be the way to go because everybody has been burned by past 
securitizations. So unless you have got, again, an explicit 
guarantee on that, what have you accomplished? I don't know 
what market.
    Mr. Silvers may be onto something, and maybe there is 
something to pursue in direct equity in small business. Capital 
is an issue as bankers look to borrowers. Just as the 
Government looks to us and our capital, capital structure and 
capital cushion in a small business is important as to how we 
evaluate it.
    So maybe that is a road you should look at is are there 
more direct equity pieces available to certain borrowers? And I 
am sure that opens up Pandora's box of a lot of things, but 
capital is king.
    The Chair. Mr. Prickett, can I back up, though, on a 
question? You said securitizations, you know, everyone got 
burned. Can you speak for a minute about why you think everyone 
got burned?
    Mr. Prickett. The whole subprime thing was basically a 
securitized train of disaster.
    The Chair. I understand that. I am asking a little bit 
different question, and that is why do you think the 
securitization market has shut down, say, for small business 
loans?
    Mr. Prickett. Probably everything else, fear, of what is in 
them.
    Mr. Atwell. Well, I think we have learned that lending 
ought to be personal. Part of the problem with securitization 
is what we need is simple intermediation. Securitization is a 
form of disintermediation, which disconnects the actual 
borrower from the people who hold the risk.
    And the person with the risk problem never has to face the 
borrower that has got the problem as well. That is one of the 
huge problems of subprime is how to even physically unwind 
these instruments where the risk has been sliced and diced so 
many ways, and it is so impersonal.
    The Chair. I take it that you think that in the long run, 
it is not a sensible approach for trying to support small 
business----
    Mr. Atwell. I think we ought to stop doing things that 
depersonalize commerce and create a framework that 
repersonalizes commerce.
    Mr. Perrins. What is the definition of ``securitization?''
    The Chair. Damon?
    Mr. Perrins. That is a serious question.
    Mr. Silvers. Yes. I mean, when we talk about--it is 
interesting, all of these discussions, which are very much 
about very tangible, real personal things can very easily turn 
into conversations that nobody knows what anybody is talking 
about.
    When we are asking about securitization, we are asking 
about the process by which loans are made, any kind of loan. It 
could be a mortgage loan, a bank business loan, a facility for 
credit card. Loans are made out there in the world by banks or 
by finance companies. They are collected by somebody, often on 
Wall Street. They are collected in a pool, and then slices of 
the pool are sold off. And then that process is repeated.
    That is securitization. And you can slice--there are all 
kinds of different ways of slicing. And then you can take the 
slices and repool them and reslice them. That is called a CDO-
squared.
    The question we are asking is kind of a very general one 
about this. And Mr. Perrins, since I have given you a kind of 
answer, you obviously had something on your mind to say about 
that.
    Mr. Perrins. Yes, I consider real estate free and clear 
owned by the family security. I don't know if that is defined.
    Mr. Atwell. Nobody knows what real estate is worth right 
now.
    Mr. Perrins. That is my point. The property that the family 
has in Milwaukee was valued in '07, appraised at approximately 
$2 million. There is a $500,000 mortgage on it.
    Now the gentlemen that I was explaining to you that I spoke 
to yesterday from this bank says, well, you know, that real 
estate, banks are not too hopped up about using real estate as 
collateral because nobody is buying. I mean, it is just sitting 
there.
    So that collateral or security, in my opinion, is weak in 
the financial world. I say it is worth $2 million. That is 
worth more than what we owe. But banks don't look at it as real 
strong security. Does that make sense?
    Mr. Atwell. Yes, you can have a situation, though, where if 
the enterprise is struggling and losing money, despite the fact 
that you have collateral, the loan goes on the bank substandard 
list. And any banker that puts a loan on their list today that 
they ought to know is going to be substandard would have to be 
brain-dead.
    Mr. Perrins. Well, if they are making money and you still 
have all this value, what is wrong with that?
    Mr. Atwell. I am not familiar with the situation, but if 
you are profitable, yes. I don't know.
    Mr. Silvers. Can I come back for a moment to the--I mean, 
it is a really profound--it is a really serious problem right 
now that we--and I think using the term ``securitization'' and 
the term of creating securities, publicly traded securities, 
not what Mr. Perrins was talking about, which is security for 
loans.
    Mr. Perrins. Right.
    Mr. Silvers. All right, which is two very different things, 
but they sound exactly the same. Looking at the use of 
impersonal credit markets as opposed to personal credit 
institutions, all right? Mr. Prickett and Mr. Atwell, you are 
in the personal credit institution business. Mr. Klink, Mr. 
Perrins, Mr. Griffith, you have each been trying to source 
credit from personal credit institutions, banks.
    Mr. Perrins. Right.
    Mr. Silvers. By the way, that is pretty much the way small 
business operates, right? It is only big business that can go 
into the impersonal markets directly.
    Mr. Prickett. I disagree.
    Mr. Silvers. You disagree.
    Mr. Prickett. Some of the names that they have put out here 
are very large institutions whose perhaps direct contact they 
have is a personal--an individual. But the decisionmaking may 
be far, far away.
    Mr. Silvers. Fair point.
    Mr. Atwell. And the ownership. And the management.
    Mr. Silvers. A very fair point. The contrast I am drawing 
is between--is not so much, say, between national banks and 
community banks, but between banks as a group and credit 
markets. Credit markets, typically securitized credit markets 
as a different way of providing funding.
    It is a problem that a lot of people in Washington can't 
figure out what to do about that our credit markets, even when 
they don't appear to be, are heavily--have been heavily funded 
by securitized processes. And those processes are broken.
    Most people seem to understand that 100 percent 
securitization takes any incentive to manage the credit risk 
off the table. It takes any ability to understand what you are 
dealing with on either end of the credit relationship off the 
table. But yet there is great pressure to restart those markets 
because no one seems to know what the alternative is.
    There is also the belief, and I think this is contrary--I 
am not saying it is my belief. But it is a widespread belief. 
And I think this is contrary to what Mr. Atwell said. There is 
the belief that shifting toward heavily securitized credit 
markets, impersonal markets, impersonal provision of credit has 
generally been a good thing, that it has expanded credit, 
dramatically lowered cost, diversified risk.
    Mr. Atwell. At least it looked cheap up until recently.
    Mr. Silvers. Yes, well, that is a wonderful thing about 
risk is that it is not--it looks okay until it is not.
    My question to you all is how would we get from here to 
there? If we wanted not to contract our economy any more than 
we have to and we wanted a more sustainable, responsible system 
of credit provision, right, one in which good credit and viable 
businesses get funded on reasonable terms and what, Mr. Atwell, 
you described as the fiduciary duty to the borrower is attended 
to, how would you get there from here?
    Mr. Atwell. I don't know that I am smart enough to answer 
that. I would start by--first of all, I am a big believer that 
how you think affects how you act. And I would start, one of 
the questions when we were sitting out here watching 
manufacturing, the manufacturing base of Wisconsin go away, and 
we would ask the question what are the new core industries in 
the United States? We got two answers--technology and finance.
    And I was struck by a phrase in 2004 that John Thain, when 
he was head of the New York Stock Exchange, said, I believe, in 
the Wall Street Journal, wrote a very flowery piece about how 
the New York capital markets are the fountainhead of world 
prosperity.
    I think a simple place to start would be to think of 
finance as simpler financial intermediaries, and they, quite 
frankly, don't really create any wealth. They are not the 
fountainhead of anything. What is the fountainhead are the 
people who do the work, the entrepreneurs who take the risk, 
and the people who actually run businesses that make things and 
serve people.
    So to think of finance not as an autonomous engine of value 
creation and a new core industry in the United States, return 
to a concept of finance as a financial intermediary. And if you 
start with that concept and then work toward what are the 
policies that support a straightforward understanding of 
financial intermediation, then you are consciously working 
toward those policies, I think that there are plenty of smart 
people in Washington that could figure it out.
    There is an unspoken problem here, which is in 2005--in 
many ways I could say the last year and a half has been the 
most challenging year of my career in banking. But quite 
frankly, the most difficult was probably 2005 because investors 
and lenders were throwing money at anything that wiggled. And 
we had our customers coming in and saying, ``Well, gee, I can 
get this loan at LIBOR plus 150. Why do you want 225 over 
LIBOR?''
    And the answer is, in some sense, I said the bank has a 
fiduciary responsibility to its borrowers. A borrower has 
somewhat of a responsibility to themselves to find a bank that 
can support them and to be willing to pay a just price that it 
takes to generate capital to support financial intermediation 
on a real basis.
    So I do think securitization ``lower borrowing costs'' or 
at least appear to until it all blows up in our faces here, and 
then we find out the costs that they were saving were really 
going to be borne by the public.
    Mr. Griffith. If I could add a comment, just going back a 
little bit here when you talked about kind of what are the 
means for small businesses to--for a company our size, that is 
$2 million or so in sales, there is no capital firms that will 
give us money because what we would require is too small for 
them.
    For us to get $200,000 or $100,000, $300,000, which would 
be a large amount of capital into our company, there is no firm 
that will do that. And I have explored that avenue because my 
bankers have told me that capital would be a good thing.
    What I believe needs to happen is that I think that the--I 
think the SBA is the perfect vehicle for small businesses like 
mine to try to obtain financing to help banks offset the risk 
of a loss. And as critical as I have been of banks, I certainly 
understand their position in that they have to assess risk. 
That is part of their deal.
    And I think the SBA is the perfect vehicle to do that. The 
challenge that I have is that why do borrowers have to first go 
through the bank in order to go to the SBA?
    I think that there needs to be if you want to explore it 
through the bank first, and the bank says you know what, I 
don't think that that is the way to go. I think that maybe the 
SBA as a first step for small businesses, and maybe you start 
there? Or maybe they work side-by-side, a bank and the SBA to--
there is a disconnect between banks and the SBA.
    Mr. Silvers. Can I stop you there?
    Mr. Griffith. Yes.
    Mr. Silvers. I just want to make clear something because I 
am not an SBA expert, and I just need to learn a little bit 
here. When you were going around to the six banks that you 
talked about, what they have said to you is we are not going to 
take you through step one of the SBA process, essentially?
    Mr. Griffith. Correct.
    Mr. Silvers. And that is the gate. That gate comes down.
    Mr. Griffith. I have been told that the bank has to--must 
feel comfortable with the loan before even going to SBA. And 
obviously, at that point, then they will send the loan to SBA. 
The SBA approves it or not. But what I have been told is that 
the bank is the gatekeeper, the first step of trying to obtain 
financing, and the bank works with SBA.
    And so, just a couple of weeks ago, which is one of the 
reasons I am here, I contacted the SBA directly, the local 
Milwaukee office, because I felt why is this agency there that 
I think has terrific opportunities for small businesses to help 
them out. And yet I cannot or at least was told that I can't 
access that opportunity.
    The Chair. Thank you. It is very helpful.
    I am finished off here. I want to say how very much we 
appreciate your taking the time. We know this is difficult to 
talk about businesses that are struggling, struggling for their 
finance. We know it is difficult to talk about what it means to 
be a banker in America right now.
    And we appreciate very much your thoughtful comments, your 
candid comments here. And I guarantee coming out of this, we 
take this information back to Washington. As Mr. Silvers says, 
our power is limited to the power of the pen, but we think that 
the stories are important, and we think the messages that you 
have given to us today are very important. And we will be 
taking those back with us, and they will be reflected in the 
reports that we are writing.
    So we are very grateful for your having taken the time to 
do this. We are very appreciative.
    I also want to say I wish we had left more time, but we 
have left a little bit of time here at the end. One of the 
benefits we have by doing these field hearings is that we get 
at least a small chance to hear from anyone who would like to 
talk to us. And so, we have a microphone set up? Here we go. We 
have a microphone that will be coming around.
    I am going to ask, so that we have an opportunity to hear 
from as many as we can, that we keep the comments to one 
minute, and then we will try to do it at least until 12:00. It 
won't give us very much time, but we will do our best here.
    If you would identify yourself, please, sir?
    Mr. Mertens. Hi. My name is Greg Mertens. I am a small 
business owner. I also used to work for the SBA. I have been on 
both sides of the fence.
    Lenders do have a fiduciary responsibility. There is no 
good guy/bad guy here. We are in a situation there is a problem 
for small businesses that needs to be fixed. Lenders are looked 
at by the FDIC, the State regulators, the Federal regulators, 
everybody. They do have a responsibility to protect all of our 
money, and I agree with that.
    As small businesses right now, we are risk takers. We have 
taken risks, and we are caught in a situation. As some of these 
businesses have said here, we have no credit available to us to 
get through a hump. We have gone through humps in this country 
before. Please allow us to get over the hump, and we will be 
okay. We will be okay again.
    But the SBA programs start with the lender. They have to 
put the brakes on. The regulators tell them to put brakes on. 
So there is a double-edged sword.
    And at the same sense, the SBA does not do direct lending 
anymore. They have a program in the past where they made loans 
directly to businesses that banks would not make. The banks now 
have direct lending ability themselves, and they are risk 
averse right now.
    And so, my suggestion is let us get over the hump. How 
about maybe reinstituting the program that was there, direct 
lending? Where the Government is doing that for the big 
companies, why not the companies that employ 70 percent or more 
of the employees in the country? Because we are on a verge, you 
have heard, of an economic pandemic here.
    Thank you.
    The Chair. Thank you, sir. Thank you.
    [Applause.]
    The Chair. Yes, sir? If you would identify yourself?
    Mr. Wickert. Good morning. My name is Brian Wickert, and I 
am the majority owner and chief honesty officer of Accunet 
Mortgage. Accunet Mortgage is headquartered right here in 
Milwaukee. We are a 10-year-old independent mortgage banking 
firm, and I want to promise you we never did one subprime loan.
    We are going to lend about $600 million direct to consumers 
this year in Wisconsin and Illinois. And I would like the 
committee to know that there are numerous high-quality 
residential loans that are being routinely denied in today's 
market because of what I call ``appraisal paranoia syndrome.''
    These loan denials are caused solely by that. And they not 
only hurt my small business, Accunet Mortgage, but they also 
hurt the consumer and drive them to the point of righteous 
indignation.
    Thank you.
    The Chair. Thank you very much. Thank you, Mr. Wickert.
    Yes, ma'am?
    Ms. Parmentier. Good morning. I am Victoria Parmentier, and 
I am the national chairperson for the Legislative and Public 
Policy Committee for the Institute of Real Estate Management, 
which is based out of Chicago. I have a small real estate 
management firm in Green Bay, Wisconsin.
    You will receive many letters from members of our institute 
regarding the credit crisis. The real estate management 
industry over the United States employs hundreds of thousands 
of people who are at risk. We have right now approximately $3 
trillion worth of debt that is going to be coming due in the 
next few years. If there is not an answer to this problem, the 
enormity of it is going to be amazing.
    The Chair. Thank you very much.
    Do we have anyone else who wanted to speak before we leave? 
We have someone else.
    Yes, sir?
    Mr. DePull. Hey, my name is Nicholas DePull. I am just a 
student here. And I am definitely not as well versed in all 
this as I would like to be, although I try to stay informed as 
well as possible.
    I guess I would just like to emphasize the need for 
complete transparency as much as possible in all of this. I 
think that the power is or could be in the hands of the people 
to really show exactly what is going on in this entire 
situation much more so than has been provided to the people so 
far, if the data was provided in an easy-to-access way to all 
the people that want it.
    And I just think that there is way too much secrecy around 
the entire thing. I know that I have heard about how AIG is 
just being used as like a vehicle to funnel money secretly to 
other places, and I just know that the Federal Reserve refuses 
to release all the details of how everything is going on, all 
the trillions of dollars that they are giving out.
    So I just think that I would like to voice my emphasis on 
transparency in the entire process because I think it is really 
lacking so far.
    The Chair. Thank you very much.
    And I want to say again that this has been a central theme 
that the Congressional Oversight Panel has, some might say, 
hammered on in each of our reports and one that we will 
continue to address.
    I remind people the way Congress designed the system is 
they gave a lot of flexibility to the Treasury Department in 
how to spend the $700 billion, but they also set up an outside 
group, and we are the outside group. And that means we push 
over and over for transparency, for accountability, and for 
clarity in what these programs are about.
    Have we heard from everyone? Is there anyone more?
    Then I want to finish by thanking the University of 
Wisconsin-Milwaukee for this room and for their support in 
helping us set this up. We very much appreciate it. The 
congresswoman, the Senator, who have been very helpful to us. 
And thanks once more to our witnesses who came and engaged in 
thoughtful conversation with us about it.
    This is a crisis of--on a scale that most of us have not 
known in our lifetimes, and we recognize the great risks facing 
our country at this moment. The $700 billion TARP plan is just 
a piece of what is happening, but it gives us an opportunity to 
talk about the role of Government, the role of regulation, the 
role of small business, the role of the financial institutions. 
It gives us a chance to talk honestly about our past mistakes 
and about what kind of regulatory road we need to construct 
going forward to make sure that we do not re-create these 
problems.
    I am grateful to everyone who came here today, and this 
hearing is now adjourned.
    [Whereupon, at 12:04 p.m., the hearing was adjourned.]
    [The prepared statement of Paul S. Beideman, Chairman and 
CEO, Associated Banc-Corp. follows:]


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